The Market Today
White House to Announce Fed Chair, Tax Plan at 10:15 a.m. CT; FOMC Preps, BOE Hikes Despite Economy
by Craig Dismuke, Dudley Carter
Congratulations to the Houston Astros (and fans) for winning their first World Series and Earning History!
Today’s Economic Calendar – Waiting on Washington: Initial jobless claims for the week ending October 28 fell 5k to 229k, continuing the post-hurricane run of surprisingly low claims reports. Continuing claims have now fallen to 1.88 million meaning there are fewer people still receiving unemployment benefits than at any point since the early 1970s. Meanwhile, the good 3Q news continues with nonfarm productivity first estimated to have increased 3.0%. There have only been two better quarters for productivity growth in the past seven years. Given the improvement in productivity, unit labor costs (the arithmetic cost of producing one unit of goods or services) rose just 0.5%. While still weak, this was an acceleration from 2Q. The markets are not interesting in economic reports this morning, however. Rather, they are focused on 1) what the tax plan will look like and 2) confirming that Governor Jay Powell is the president’s selection to replace Fed Chair Yellen (more below).
Tax Reform Plan Schedule for Release: According to a memo sent out from Speaker Paul Ryan at midnight, the tax reform plan will be revealed to congressional Republicans at 8:00 a.m. CT and to reporters at 9:30 a.m. At 10:15 a.m., the House Ways and Means Committee leadership will hold a press conference to unveil the details to the public. There is much speculation about the plan and we will avoid wading into the uncertainty. One note, however, is that any temporary tax reform will disappoint the markets.
White House to Announce Pick for Fed Chair: President Trump said yesterday that his pick to head the Fed would be announced today. Reports this morning say this will occur at 2:00 pm CT. Speculation continues to be that Board Governor Jerome (Jay) Powell will be tapped with the WSJ reporting at 3:15 p.m. CT yesterday that the White House had already called Powell to confirm his appointment. Powell is arguably the most dovish of the candidates the president is considering. At the Fed’s annual Jackson Hole Symposium, Powell made a few comments of interest. He noted that monetary policy could not materially alter the long-run growth outlook and, importantly to the markets, said that the Fed has the luxury of being patient given how low inflation is running. While Yellen has made similar comments, she has seemed to lean toward proceeding with rate hikes because of the expected future inflation given the low unemployment rate. Powell will likely support the president’s regulatory regime better than current Chair Yellen.
Overnight Activity – BOE Hikes Citing Sluggish Growth: For the first time in a decade, the Bank of England hiked its target rate to 0.50%. However, this was not your normal rate hike fueled by strengthening economic conditions and the subsequent risk of faster inflation. According to the BOE statement, “consumption growth [is expected to] remain sluggish in the near term,” “inflation is expected to fall back over the next year,” “the decision to leave the European Union is having a noticeable impact on the economic outlook,” and “uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly.” This hike is a response to the weakening of the Pound and the resulting, temporary increase in inflation. As such, British strategists are now debating if this is a “one-and-done” hike or if they will be able to hike one more time next year. The U.K. 10-year yield is down 5 bps to 1.29% and the 10-year Treasury yield is down 1 bp to 2.36%. The FTSE 100 stock index is up 0.7%, the Japanese Nikkei is up 0.5%, the Euro Stoxx 50 is down 0.3%, and S&P futures are down 0.3% from yesterday’s close.
Yesterday’s Trading – Fed Funds Futures Move to 92% Chance of December Hike after FOMC Statement: Markets were fixated on the president’s pick to be the next Fed Chair yesterday with longer Treasury yields down a few basis points, stocks higher, and the Dollar stronger. The 10-year Treasury closed the day at 2.37%, down 1 bp, while the 2-year closed at 1.61%, up 1 bp. The yield curve has now flattened to 75 bps between the 2-year and 10-year, half a basis point from its flattest slope of this cycle. Fed Funds Futures contracts were active after the FOMC meeting yesterday, going from pricing in a 85% likelihood of a December rate hike to a 92% likelihood.
FOMC Upgrades Economic Assessment Keeping December Hike on Track: The FOMC voted unanimously to leave their target overnight rate range unchanged at 1.00-1.25%. The majority of the changes in the October Statement were related to the messaging regarding the hurricanes and their effect on the data. The most material change was in the assessment of economic conditions. September’s Statement that “economic activity has been rising moderately” was revised to say, “economic activity has been rising at a solid rate.” The balance of risks continues to be seen as “roughly balanced.” While yesterday’s policy Statement was an important reflection of what to expect at the December 13 FOMC meeting, today’s scheduled announcement of the president’s selection to replace Chair Yellen looms even larger.
ISM Manufacturing Index Pulls Back but Remains Solid: The October ISM Manufacturing index fell 2.1 points to 58.7, remaining at a strong level. The pullback was at least partially unwinding of a hurricane-induced jump in the September report. The supplier deliveries subcomponent, responsible for a significant portion of the September increase when deliveries were delayed due to the storms, dropped 3 points in October. Apart from the hurricane impact, the new orders subcomponent pulled back 1.2 points while the employment and new export orders subcomponents dropped 0.5 points. However, all three important indicators remained at very solid levels despite the pullbacks.
Construction Spending Boosted by Public Projects: Construction spending for the month of September beat expectations rising 0.3% MoM. However, August’s 0.5% growth was revised lower to just 0.1%. All told, construction spending is now roughly where economists expected but with a weaker August rate and a stronger September rate. Residential construction was boosted by a rare 0.6% MoM gain in multi-family activity while single family activity rose 0.2% and home improvements fell 0.6%. Non-residential construction fell 0.8% MoM on weakness in manufacturing, power, commercial, and office activity. Public construction projects were boosted 2.6% MoM on 5% jumps in both educational and transportation construction. Private residential (+9.6% YoY) continues to be the primary driver of construction activity as single family (+11.9% YoY) activity has ramped up in 2017.
October Vehicle Sales Remain Elevated: Auto sales fell from an annualized pace of 18.47 million to 18.00 million in October, reversing part of their hurricane-related September increase. Using the pre-hurricane 3-month average pace of sales, almost 300k more autos were sold in September and October than would have been expected. If 500k cars were flooded in Texas following Hurricane Harvey as reported, next month’s auto sales report still has potential to be elevated. Ford’s October sales are up 6% versus October 2016 sales while SmartCar’s sales are down 67%, Isuzu’s sales are down 58%, Fiat’s sales are down 44%, and Tesla’s sales are down 29%.